Deciding between a pension annuity or lump sum payout is often a tough choice and one that requires a comprehensive perspective.  The struggling economy has taken its toll on pension funds as both the Public and Private Sector face shortfalls.  A quick Google search for ‘pension shortfalls’ shows just how fast this problem is growing.

If you are currently preparing to make this choice or will one day have the option; take the following points into consideration:

Budgeting – Evaluating your spending habits is critical to ensuring a lump sum payout can last your lifetime.  Pensions often prevent families from over spending.  A good question to ask is, can we live off 4% of the lump sum per year?

Pension under funded? – If you are receiving notification that your pension plan is under funded you will need to explore this further.  Many pension plans have reduced benefits to curtail losses.  Beginning in 2013 new accounting measures will hopefully better reflect the health of pensions.  The following link from the Wall Street Journal gives us a glimpse of how Public Sector plans may look:  http://blogs.wsj.com/economics/2012/06/25/is-your-pension-underfunded/

Inflation – Pension plans often offer no protection against inflation while lump sums give you the control to manage the proceeds.  See if your pension plan offers a cost of living adjustment.

Legacy – Consider whether the pension is payable to your spouse upon your death.  Under the lump sum option you will have a choice of leaving the remainder to your estate.

Investment risk – While lump sums give you control over the assets you must also bear the responsibility of investment decisions.  Assuming the employer isn’t forced to reduce pension benefits, you may have to curtail your spending if your lump sum investment decisions do not payoff.

The choice between pensions or lump sums always requires a comprehensive perspective.  I encourage anyone facing this decision to consult with their financial adviser and request a full financial plan that fully explores both options.  If you’re interested in seeing how a financial plan can prepare you for this decision give us call.